UK monetary trends are consistent with an ongoing economic recovery but growth is likely to moderate from its recent bumper pace:
-
M4 excluding intermediate other financial corporations (i.e. M4ex) rose by 2.9% annualised in the three months to October. Growth remains weak by historical standards but is sufficient to support solid nominal income expansion because of a rising trend in the velocity of circulation, caused partly by negative real interest rates. (Velocity – defined as the ratio of nominal GDP to M4ex – increased by an annual 4.4% in the third quarter.)
-
Within M4ex, money holdings of private non-financial corporations rose by 6.6% annualised in the latest three months. Stripping out the overleveraged property sector, the corporate liquidity ratio (i.e. non-financial companies' sterling and foreign currency deposits divided by their bank borrowing) is at a record high in data extending back to 1998. The ratio leads business spending (i.e. fixed investment plus stockbuilding), which is up by 25.7% from a trough in the fourth quarter of last year.
-
Household M4 growth – 2.6% annualised in the three months to October – continues to be depressed by a portfolio switch out of bank and building society deposits into higher-yielding investments. Retail inflows to unit trusts and OEICs totalled £24.9 billion in the 12 months to September, equivalent to 2.5% of household money holdings (October figures are released on Wednesday).
-
Two considerations suggest a slowdown in GDP growth from 3.9% annualised in the second and third quarters. First, while M4ex is rising at a satisfactory pace, faster price increases – due to the coming VAT hike and higher food and energy costs – will cut real expansion, implying less monetary stimulus for economic activity. Secondly, narrow money has slowed recently, with annual M1 expansion falling from 8.3% in June to 3.0% in October.
